There is no denying that taxes can be complicated. To give you a helping hand, we have put together some common tax errors so that you can avoid making them.
Not claiming the right expenses
One of the biggest mistakes that people make when it comes to taxes is not claiming all of their expenses, resulting in them spending more money on their taxes than necessary. To illustrate this, we will take a look at some of the expenses that freelancers and contractors can claim today.
Let’s begin with travel. You may need to travel somewhere for business purposes or you may have a temporary place of work. You can claim this as an expense. For the initial ten thousand miles in a fiscal year you will benefit from a rate of 45p per mile. After the first ten thousand miles, this rate will then reduce to 25p. It is important to note that that if you are a passenger in a vehicle you can only claim 5p per mile. Don’t forget to keep your receipts when using public transport!
Aside from this, accommodation, food, and drink, are further examples of expenses that can be claimed for. Unlike travel, there is no set allowance for this type of expense. Nonetheless, you can’t expect to claim for luxurious stays in the fanciest hotels, you need to be reasonable.
Other expenses include the likes of training, equipment, and clothing. When it comes to training, you need to make sure it is completely relevant to your line of work. Any equipment can be classified as an expense. Nevertheless, you will need to provide evidence to show that it is necessary for the work you are carrying out. When it comes to clothing, you cannot claim ordinary work clothes. Yet you can claim for protective clothing or any clothing that relates to the performance of your work. The best way to determine whether your clothing can be claimed for is to ask yourself whether you can wear it outside the workplace. If the answer is no, you can claim it as an expense.
Not knowing if you’re eligible for R&D credits
There are also a lot of business owners that are missing out on R&D tax credits, with R&D standing for Research and Development. A lot of businesses are entitled to claim thousands of pounds for R&D, yet they do not realise it. These credits were first introduced back in 2000. They are designed so that you can claim back the money that you have invested in researching and developing. Of course, there are a number of stipulations that need to be met.
You must be liable for corporation tax first and foremost. Aside from this, you must show that your company has taken a risk by doing something innovative, whether this is the creation of a new process, developing a new product, or improving a service. If you can show that this is the case, you will qualify for these credits.
Handling taxes on events incorrectly
Most companies will reward their employees with a party at some point, especially when the Christmas period comes around. There are other social events that may be held throughout the year as well. You may host an annual company award ceremony for instance or you may decide to reward a department for their performance on a big project. But, are these parties and social events tax deductible? Read on to find out everything you need to know…
There are certain events and parties that are exempt from tax altogether. In fact, you will not even need to report them to HMRC or pay tax and National Insurance on them. So, what does your party or event need in order to be completely tax deductible? Firstly, it needs to be an annual occasion, with your Christmas party being the obvious example. Some companies host other annual events, such as a yearly summer barbecue. Thus, if you are merely hosting a one off event, you unfortunately will not be exempt from tax.
Aside from this, the event needs to be open to all of your employees. If you are merely hosting the occasion for a select group, your event will not be exempt of tax. Nevertheless, let’s say your business is based in more than one location, i.e. you have one business in London and another in Manchester. If you host an annual event for the employees at the Manchester business, yet not the London business, this will qualify as being tax deductible. You can also put individual events on for each department, so long as all your workers have an opportunity to attend one of them.
Finally, the other requirement is that the party costs no more than £150 per head. If the event is more expensive than this you will need to pay tax on it. This is the combined cost of all annual events. Thus, if for some reason you host ten annual events throughout the year, you will need to ensure they are no more than £15 per head per event on average to avoid being charged. For employees that earn less than £8,500 per annum who are not directors you won’t have to pay or report the event.
So, what happens when your event is not exempt? How much do you have to pay? What will you have to report? You will need to pay National Insurance on the events and you will need to report them to HMRC. However, it is crucial to note that the system does not merely work by charging you on anything in excess of £150 – that’s not how it’s calculated. Instead, let’s take a look at an example. Let’s say you hold an annual summer ball and a Christmas party. The ball costs £100 per head and the Christmas party costs £70 per head. You have gone over your £150 allowance with both events combined. However, both events individually are less than £150, so you are able to put one of them through the tax and the other one will be exempt. Thus, the summer ball will not be charged but the Christmas party will be.